GM and Stillwater Mining Co. It’s Back on!

30 12 2010

After abruptly dropping a decade-long business relationship with Stillwater Mining Co, the only U.S. platinum group metal (PGM) miner, as part of its bankruptcy restructuring in July 2009, General Motors has renewed its relationship with its palladium supplier. You may remember the controversy sparked by GM’s petition to a federal bankruptcy court to reject the then existing agreement with Stillwater and retain those in effect with Russian and South African suppliers.

As per the recently concluded deal, Stillwater Mining Co will provide palladium to GM for three years based on the market average price at the time of sale. The new agreement has removed the floor and ceiling prices features of the previous contracts. Stillwater Mining Co is also in discussion other automakers including Ford whose current supply agreement will soon be expiring.

As a result of the recovery in the auto sector and increased investor interest in PGMs, palladium performed well in 2010. These factors should keep supporting prices in 2011 as it is suspected that investment demand (such as demand from exchange-traded funds) could push the metal into a supply deficit in the coming year. Moreover, some analysts predict a 15% increase in gross demand. For Q1, Société Générale predicted that palladium would trade at $800 an ounce in average but warned that a correction could be expected as it perceived the metal has over bought.





Mega gold mine: Everything is [almost] sorted!

7 02 2010

Barrick Gold’s Pascua Lama transnational gold mine may soon materialize. This mining project is quite unique. This deposit straddles the border between Chile and Argentina with 75 per cent of the deposit located in Chile and 25 per cent in Argentina at an altitude of over 4,500 meters above sea level.

This project has faced many hurdles, including strong public opposition and lengthy court action, but it seems that the last practical difficulties will soon be solved. As this mining project is the first on its kind, governments had yet to develop the necessary agreements to render it possible. Taxation of profits remained a contentious issue however the governments are reportedly close to reaching a deal.

According to Reuters, Chile and Argentina will be taxing profits depending on which side of the border the gold and silver will come from. The taxation of transborder services (i.e. services provided by individual companies on either side of the border) remains an outstanding issue and discussions are still held on the matter. While government officials have expressed their confidence in reaching an agreement on those last details, fine print of this type could prove intricate.

Another key element in making this transboundary mining project possible was the signing in 1997 of the Chile-Argentina Mining Integration and Complementation Treaty Agreement which was drafted in consideration of more than 20 transboundary deposits identified. The Treaty, which is the first of its kind internationally, allows the exploration and exploitation of both sides of the countries’ borders without restrictions and regulate issues related with labour, environment, health and investment policy. Particular mining projects are governed by Additional Specific Protocols to be established under the Treaty. At present only two Protocols have been drafted, one for Barrick Gold’s Pascua Lama and another one for Xstrata’s El Pachòn.

El Pachòn is a copper deposit entirely located in Argentina but due to its location at only five kilometres of the border is subject to the Treaty. Under current timetable this project would begin construction in 2010 and be commissioned in 2013. As for Pascua Lama, construction began in mid-2009, 15 year after the company first acquired the property leases.

Pascua-Lama has proven and probable reserves of 17.8 million ounces of gold, with 717.6 million ounces of silver and 649.5 million pounds of copper. The mine has an estimated mine life of more than 25 years. The mine will have one of the lowest cost gold mines in the world with an estimated $20-$50 per ounce average costs expected in first full 5 years. The mine will be commissioned in late 2012.





Large low grade gold deposit in low risk jurisdiction. Who wants a piece ?

14 11 2009

I hope that the previous post at least made you curious to know what the future was holding for the host community of McWatters’ Sigma gold mine. If it is not the case, just pretend and read through. In 2004, the McWatters’ property in Abitibi Témiscamingue was purchased by Osisko who plans to begin to extract from the low-grade gold deposit in 2011. Osisko’s has been very successful so far with the early stages of the project’s development. Everything seems to go as planned, recent exploration carried at the periphery of the deposit has been rewarding and financing is pouring in. Has Osisko really hit a home run ? and has it been that easy ?

Osisko: simply too good?

With a name like that, it could as well be a popsicle flavour.But it’s not. In a nutshell the company is planning on exploiting a huge low-grade gold deposit (survey results vary between 8.60 g/t and 1,55 g/t) located in Malartic in Abitibi Témiscamingue. The company purchased the rights in 2004 following the bankruptcy of McWatters of which you have heard of the debacle in Thursday’s entry. This deposit has the potential of becoming Canada’s second largest gold mine covering 230 square kilometers of land. The open-pit mine is expected to produce 591 000 ounces of gold per year for a 10 year-period. At present resources are estimated at 6.28 million ounces in proven and probable reserves (also in the computation are 1,4 million ounces in indicated resources and 720 000 ounces in presumed resources). The resource is expanding as the company pursues its drilling program. In its feasibility study Osisko reported that it exploitation costs were of US $319 per ounce which is claimed to be low on the cost curve. Capital costs are estimated to be of US $146 per ounce.

Osisko is sufficiently well-financed to go ahead with the Canadian Malartic project as well as explore the feasibility of other plays. The company has been through a successful streak of financing moves in the past year and on September 24th, the company announced that the funding needs for the Canadian Malartic project had been met following an $150 million agreement with the financing arm of Canada Pension Plan, the CCPIB. This deal allowed the company to fulfill the terms of a previous financing with the Société Générale de financement du Québec with whom the company had a CA$75 million agreement that was condition to the company raising CA$225 from other sources. On September 1, 2009, the company announced that a right issue had allowed it to raise CA$149,5 million. In February this year, Osisko raised C$403-million in a bought-deal offering, making it one of the first junior miners to raise equity finance after markets froze up in the fourth quarter of 2008. Big miners are also acquiring stakes in Osisko. In mid-August Goldcorp took a 13 per cent equity stake in Osisko and further acquired shares on September 1st. Rumors that Agnico-Eagle could be interested in buying Osisko have also become widespread as on June 25, the trading volume in Osisko share became unusually high. Kinross is also rumoured to be interested in Osisko. It has been reported in the media that a bidding war for Osisko would not be a surprise.

It’s no free ride

Despite its latest successes, Osisko has had to face quite significant challenges so far.

When purchasing the property in 2004, Osisko inherited the legacy of McWatters in the form of six mine waste disposal sites totalling an area of 500 hectares. The cost of rehabilitating that area is estimated to CA$25 millions and will be shared equally between the Ministère de Ressources Naturelles et de la Faune and Osisko. The company is finding some benefit to this agreement as the company will be able to dispose conveniently of its processing waste as part of the rehabilitation effort. Processing waste of Osisko will generate an acid-free tailings and will not be leachable. To receive authorization for the development of the Canadian Malartic project, the Bureau d’audiences publiques sur l’environnement recommended that financial guarantees be required to ensure that the project can be undertaken in a manner consistent with the sustainable development objectives of the province. To that end, the company has made available 100 per cent of the funds necessary to rehabilitate the Canadian Malartic mine at the end of its useful life which is above the 70 per cent threshold usually required (but that sometimes does not get paid at all).

Other technical hurdles to the project included the relocation of 205 homes, a daycare center, and a church which happened to be on the land that the company is projecting to mine on. A school was also demolished in the process and on June 15th, the city organized a celebration for the event. This sounds a bit unusual but since Malartic as a population of 3500 inhabitants, the bulk of them probably went to the same school. Ok, you digress Pepito.

In sum, details like a legacy of environmental liability and housing getting in the way seem not to have been huge issues. However lately, a few news stories on Osisko broke in the news and as much as the company can come across the white knight bringing jobs and environmental relief to yet another remote region of Canada, vibrant resistance from key stakeholders has emerged. The Anishinabeg Nation (Algonquins in short) has expressed its intention to block the project as they have not been consulted. They consider the Osisko site to be on their ancestral lands and are contesting the project on the grounds that previous rulings have established a constitutional obligation for governments to consult and to accomodate First Nations.

The MP representing the riding in which Osisko operates has been blamed by a member of the opposition’s far-left party, Québec Solidaire, of being too close for comfort with the company. Additionally the Minister in charge of Aboriginal Affairs, Pierre Corbeil, is also quite close to mining interests as soon after his electoral defeat of 2007 he became a member of the board of directors of Canadian Royalties, a mineral exploration company active in Nunavik. While this may not be saying anything about Osisko’s work ethics, I can share from my very young career in the public service that it is not rare to see MPs getting involved to attract big investment projects.

Canadian Malartic is very likely to be the largest private-investment project in Québec this year and its position as the biggest gold inventory in a single, low-risk spot is making it a quite attractive play for investors. It is worth keeping an eye on developments.





Zeniths & Abysses

20 10 2009

The mining and metals community, since the beginning of the year, has had love for copper and gold only. Other metals unless they bottomed tragically were left outside news coverage as average performances are a bore to report on. It now seems that copper and gold may have reached their zenith as other metals and minerals are ready to take off

Gold: its 15 minutes could soon be over…

With gold reaching a new record price almost everyday, how dare I tell you that the fun may be over? With speculation being the sole driver of price increases, the enthusiasm of some will eventually deflate. Investor switching out of gold exchanged traded funds is indicating that to some degree. Since Q1 inflows in gold ETFs followed by Reuters has been steadily decreasing. In Q3 inflows amounted to just over 697,000 ounces in Q3, against 995,000 ounces in the second quarter. The weak physical demand is worrisome and leads to question the sustainability of current gold prices although they are expected to remain around the US $1000 level for the next few months as USD remains low.

Copper: feeling the pinch?

Are prices running ahead of demand? 5-month record high LME inventories can give an indication of that.  Chinese stockpiling, improving macro data and new investor cash have helped copper prices more than double this year but Chinese demand for the metal has been declining for three consecutive months as stockpiling slows. Freeport-McMoRan Copper & Gold Inc said on Monday (Oct 12th) that the copper market’s prospects for next year are as yet uncertain and a strong Chinese economy will be key to demand.

Silver: in no way second.

Like I mentioned about a month ago silver is doing well and will continue to do so. This year silver has taken much of its price direction from gold (and copper to some extent), With half of the demand for silver coming from industrial uses, the expected economic recovery will further propel prices for the metal.  Silver prices have already increased 87% this year while gold prices have increased 48%.

Diamonds.

Rough diamonds prices have been picking up in the past weeks (Rio Tinto raised its prices by 15%) and companies have restarted mines and processing capacity which is good news after  prices falling 65% this year.

 It is unclear if demand is rising in developed countries as producers are unsure whether the increase in sales is due to restocking ahead of Christmas or to genuine demand growth. That is what we will find out after Christmas. In the meantime, strong growth in demand can be seen in China and India.

All things considered, it could be secondary to determine whether demand is really picking up as the supply of diamonds is at so tight a price bubble may be expected according to RBC Capital Markets’ report titled “Diamonds – Where Will All the Rough Come From?”. The bubble-potential stems from the top diamond producers reducing their output significantly this year whilst new mines will be operational in 2011, at best. Leading to 2011, we expect African and Russian mines, which are older, to start producing less.

Nickel: your ultimate underdog

Word on the street is that nickel prices may have turned the corner. Nickel now has a new floor price and will be a top performer in an upcoming commodity supercycle underpinned by growth in Chinese demand. This is what was reported from the Australian Nickel Conference. Those conclusions sound like echoes from a previous commodity boom, just as if a consultant recycled content from a 2007 presentation.

Still, it can be interesting to have a look at nickel in light of its longer-term prospects due to its uses in new alternative energy forms such as nuclear, solar and wind that could help broader nickel uses beyond stainless steel which accounts for two-third of nickel demand. Despite stainless steel output rising 24.5% from Q1 to Q2, nickel prices have remained significantly low as LME inventories remained high as the LME is the market of last resort for nickel and does not deliver ferronickel, the material of choice for stainless steel. With idled capacity resuming operations, the next big move for nickel is expected to be on the downside.

Conclusion
Shortages or tight supply is expected to be an issue for commodities as idled capacity could take time to restart. Prospects are uncertain for many commodities as Chinese imports are expected to lower for the second part of this year although this does not make consensus. Of note, Goldman Sachs is cutting its exposure to commodities as other banks like JPMorgan Chase have increased their exposure steadil throughout the year. More on that here.





Precious Metals: the rush is still on

13 09 2009

Last week I got a hand on a Mergent report on precious metals in North America. I went through it thinking that I would post a summary online but with the long week end taking off you can guess where my motivation went. This week there was a lot of news coverage (as always!) on gold and silver. There was also a great deal of speculation about Xstrata’s Lonmin bid which stole the spotlight from other platinum metals group news but coverage was mainly dominated by gold.

Since the financial crisis kicked off last year gold has established itself as the top choice of investors as it soothes worries about inflation, the falling value of the dollar and other risks in financial markets. Gold treated investors well this week as it rose above 1000$ per ounce which made producers wonder whether to hedge or not. Higher prices are mainly attributable to a weaker USD (for more info about the gold/dollar relationship click here). Still, some analysts don’t see gold prices rising much higher than USD $1000 an ounce in the short term.

“I’m a bit sceptical about this move, I must say, because I believe speculative positioning is already long. Commodity prices in general are overbought,” he says. “There’s room for a correction. I don’t sense this is the long-awaited, decisive push through $1,000 an ounce.” Philip Klapwijk, chairman, Gold Fields Minerals Service quoted in MSNBC.

There has been some dissent with this generally shared view lately as the consumer price index (down 0.2% in July) has declined (due mainly to lower oil prices) and the value USD lowering but not doing too bad at this moment. The rising price of gold could also reduce jewellery sales as it is the buying season in India. Australian gold miner, Focus Minerals expressed concerns that speculative investment in new mines might also expand the gold supply and could lead to price crashing down.

As for silver, it is doing well (so well!). It has been an excellent performer in the past weeks and my impression is that everybody wants to be a Coeur D’Alene Mines shareholder. Seeking Alpha has made a few articles on this company and the Mergent report that I mentioned earlier presented it as a leading company in the US for silver.

Well that’s it for precious metals this week.